Fonterra was formed just ten years ago by bringing together all co-ops in New Zealand with the NZ Dairy Board. They have 10,500 farmer shareholders who are now receiving the same price for their milk as farmers everywhere else in the world even though their production costs are only a fraction of production costs in most of the EU and US.
The success of this venture has enabled them to become one of the world’s biggest co-ops, processing 15.5 billion litres annually.
Seventy-five percent of its production is sold in the form of dairy commodities and 25% as consumer products.
Fonterra collect 90% of all New Zealand’s milk, which is growing at the rate of 3% per year and export 95% of their production.
Fonterra’s chairman Sir Henry van der Heyden (he was knighted for his services to the industry) visited Ireland recently. He said that the mindset of the New Zealand farmer was different to that of the EU farmer in that the NZ farmer and Fonterra looked for a market solution to price volatility rather than the political solution.
The milk quota regime in the EU benefited New Zealand farmers much more than EU farmers and that is one of the reasons that milk production in NZ has more than doubled while milk production in the EU has remained static since quotas were introduced in 1984.
Milk production in Northern Ireland increased by 40% during this period because farmers there were able to purchase quota from England, Scotland and Wales as production fell in these areas.
Henry van der Heyden, in an interview with John Boylan for the Irish Farmers Journal, had some very interesting answers.
John Boylan: How do you see the proposal to increase milk production by 50% by 2020? Will we be able to process and sell the extra production?
Sir Henry van der Heyden: The world’s population is growing and the number of people who can afford to buy fat and protein is increasing rapidly in the emerging markets. The demand for dairy products is expected to grow by 2.7% per year for the next ten years.What’s more, their demand is diverse, for example China is consuming more protein while in India fat is more in demand.
Consumption of dairy produce in India is projected to grow by 45 million tonnes between now and 2019, in China by 36 million tonnes, the rest of Asia by 19 million tonnes, Africa by 21 million tonnes, Latin America by 18 million tonnes, US and Canada by 11 million tonnes and the EU by 6 million tonnes — a total of 156 million tonnes (see Figure 1).
There is a great opportunity for Ireland, where milk production has been capped since 1984, to grow and take part in the growing demand for dairy produce in the developing world.
Ireland, like New Zealand, has the ability to produce milk more cost effectively than most countries in the world and, since production in Ireland takes place at a different time of the year, the two countries could compliment each other with pasture fed milk products if Ireland chooses to sell the extra product on the global DairyTrade Internet Auction (gDT).
As regards processing and selling the extra product, the increased 2.5 billion litres (2.5 million tonnes) could be processed by one 25 ton per hour drier and sold on the gDT with no extra sales force cost.
You put strong emphasis on the integrated approach to dairy companies, why do you think this is so important? What is wrong with a centralised sales house for commodities like butter and cheese like we have in Ireland?
For an industry to be successful, there can only be one board of directors and one management team to bring the milk from the farmer to the consumer.
In the dairy industry, the chairman must be a farmer, there must be a farmer majority on the board where farmers must be elected on a national basis.
You cannot separate processing and selling.
For the Irish dairy industry to grow and expand successfully the Irish Dairy Board must integrate with the processors to form one integrated unit.
You cannot have two boards and two sets of management teams going in different directions.
There is too much money on the table and too much duplication and cost when we separate the processing from the selling of dairy products.
You are very strong on co-operative ownership and the value of the co-op versus the PLC. Have you changed your mind on this since the rejection of the first Fonterra capital restructure five years ago?
Farmers must retain control of the board at all times, they will need different sources of funding but farmers must retain full control.
Irish processors worry that Fonterra’s gDT auction is controlled and not transparent enough. How would you answer them?
There are 350 qualified bidders registered to trade on the platform and over 100 of them participate at every auction event. The bidding is open and transparent, shows all the volatility at the time of the sale and virtually everything that is on offer is sold at each event at the price bid by the participants.
At each event we sell at three-, six- and 9-month contracts, which means that the product is moved on to the customer as soon as it becomes available.
This also saves storage and inventory carrying cost. The dairy market is finely balanced at the moment.
There is a huge opportunity to grow sales of dairy products but there will always be volatility and the gDT auction will show that volatility twice each month.
Would Fonterra buy an Irish dairy processor or combine with one to manufacture a specific product as they have done with FrieslandCampina?
Fonterra would prefer to work in partnership with other milk processors anywhere in the world to develop new high value products from whey and lactose rather than to buy other companies.
A big percentage of growth in dairy demand is dependant on population and income growth in China and other developing countries. What is the biggest risk to growth in demand?
The biggest risk to dairy demand would come from another global economic catastrophe caused by a double dip in world trade where demand from China and other developing countries’ products collapsed, which in turn would undermine the income of the new middle class workers.
When will we see US dairy products on Fonterra’s gDT?
Fonterra are in discussions with several US dairy processors who have shown an interest in putting dairy products on gDT within nine months.
There are also five major international players showing an interest in selling product on gDT.
You have said that Fonterra will export more out of the EU than is imported into it. Can you explain?
The UK butter market was a major outlet for New Zealand butter and they had trade agreements with the UK for a large percentage of their sales, but now butter on the emerging market is giving a higher nett return to Fonterra from that butter and subsequently they are only exporting about 25% of their original quantity into that market.
They also plan to source more product in the EU to fill orders for their expanding consumer and high-end markets.
You are very bullish on continuing supply growth in NZ for the next 10 years. How can you be so optimistic given the constraints and challenges on water, emissions and animal welfare concerns among the public in New Zealand?
Fonterra has already got commitments from government to harvest water from Southern Alps Mountains high above Canterbury plains.
This water will be used to irrigate the fertile plains where grass will be grown to produce more milk.
This alone has the potential for the South Island to produce as much milk as the North Island, an increase of 5 billion litres.
Fonterra is planning to spend NZ$250m on a 30 tonne per hour spray drying plant. Is the $250m the cost of the drier or does it include all of the associated costs including waste management? What volume of milk will this unit handle annually?
The $250m includes all costs from planning to sales of the product and the unit will be capable of processing 3 billion litres of milk.
Are you expecting a big increase in milk production in NZ this season, given the good finish to last season leaving cows in good condition?
We do expect an early start with a good lift in milk production this season as grass covers are good at present.
The predictions are for an overall 3% increase for the season but all that depends on the weather as the season progresses.
Source: Farmers Journal
